On 8 Nov, 2016, the Indian
government decided to strip the currency unit of the country’s status as legal
tender (Demonetization). By declaring the 500 and 1000 rupee notes banned in the country, the
government has owned few haters as well as many supporters. This process of turning of the black economy into white is possibly the
single biggest decision taken by the Indian government since Independence.
India’s financial management has not changed since the British were thrown out
of India. The corrupt systems have continued. What also continued is the
class-ridden autocracy with a few controlling most of the wealth.
India has a thriving cash economy.
A majority of businesses in India run on cash with no transparency or
accountability. This money never enters the tax system of the country. It is a
‘leakage’ from the economic cycle adversely impacting the working of the Indian
economy. Two thirds of India’s GDP is cash economy—around Rs 90 lakh crores. It
is the honest tax-paying citizen of the country who suffers. If you as any businessman, he will abuse the government for
announcing the demonetization of the currency as must be having some handsome amount of
money lying in cash at his home. On further talks, I realised that he earns
much more than a college graduate at a consulting firm. The local grocery store
owner pays no taxes, whereas the college graduate takes a significant cut in
his salary to pay the taxes.
It just shows that the law abiding
tax paying citizens of the country subsidise the ones dealing in black money.
With a large amount of unaccounted money in the economy, the government is
unable to collect enough tax revenues. This forces them to increase taxes,
which in turn impacts the honest tax paying citizens rather than the ones
dealing in black money. They remain unaffected. The cash economy is responsible
for the existence of rampant corruption. Money just runs the system with no
accountability. With demonetization, it is not necessary that corruption will
be weeded out of the system, but it will definitely enable the system to
capture the flow of money. Inflated property prices will be the first one to
get affected by this clamp down of black economy. There were properties that
were selling at a ratio of 90 per cent black money and 10 per cent white. This
ratio may reverse with the new demonetization drive. When the Income Disclosure
Scheme (IDS) was launched in 2015, 64,275 people revealed assets worth Rs
65,250 crore. That’s not enough to clean up the economy.
It is not the first time in the
history of India or globally that demonetization has happened. In India, it
occurred one-and-a-half years before Independence in 1946, and again in 1978.
The drive could not be successful earlier as people anticipated the move. Thus,
they had ample time to park their black money in safe zones. Also, the
circulation of higher denomination notes was not as high then as the current 86
per cent. Similarly, several countries around the world, such as Zimbabwe,
Myanmar, Libya, Turkey etc, have demonetized their currency over the years
either to curb a black economy or hyperinflation. But, none of them did it the
way current Indian government has done it. Within three hours, almost 80 per
cent of Indian currency was turned into paper.
One of the biggest reasons that
why this move would possibly have a significant impact is that no one saw it
coming. Hence, people didn’t get time to think and park their money. The
suddenness of the move is expected to deliver the results. A step like this can
result in the cleaning up of a system for which many believed it could not be
done, as earlier attempts did not have significant impact. However, the
decision by Prime Minister Modi is one the most historic steps in Independent
India. A decision like this can help curb inflation, recapitalise banks,
reducing the interest rates and making the economy vibrant, with capital
inflows. The taxes will be spread to a much larger population. At present only
2.6 per cent of the Indian population pays taxes. Some just don’t make enough
and the others who do, siphon off the money. If this plan works, the
ramifications of the currency demonetization can touch all parts of the Indian
economy.
Such changes can never be a walk
in the park. It will have collateral damage in terms of inconveniences, lack of
liquidity, adjustments and more. It is not just an ATM machine that is being
recalibrated, but the whole financial machinery is. But it is a small price to
pay for the bigger goal of flushing out the entire black money from the country.
It is what the people have been asking for a long time, and has finally
happened. Nations were never built in a day and stepping stones like these may
not be easy to traverse but are essential to reach the final destination.
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